‘The problem of plenty was a blessing in disguise’

It has been a significant year so far for Hatsun Agro Product Ltd. With the dairy sector hit by the ‘problem of plenty’, as its chairman and managing director R.G. Chandramogan puts it, the company has grabbed the opportunity, even if at a high cost, to grow its business. The company’s turnover crossed the Rs 1,000-crore mark for the first time in 2008-09.

In the first half of this year alone its income was Rs 1,020 crore. The drivers of growth are the Arokya brand of milk; Ibaco chain of ice-cream parlours, which will make it a market leader in the segment; and Hatsun curds. The dairy ingredients business, consisting of long shelf-life products, including ghee and milk powder, is close to break-even and is set to grow. Hatsun has emerged a national brand while liquid milk will dominate the South, he says.

How has the year been so far for Hatsun Agro?

The year has been very good. We are nearly saturated to capacity at 22 lakh litres of milk a day, a 27 per cent increase in the quantity handled. Our overall growth has been around 18 per cent, while the entire country has recorded 15-20 per cent growth.

This was possible because a lot of small and medium dairy players were unable to lift the heavy arrivals of milk.

Hatsun Agro used this opportunity to expand its base and increase procurement for the next level of growth. The company plans to expand capacities by 5 llpd in south India.

This are the positive aspects regarding milk. The surplus has been a blessing in disguise.

Why was this so?

The problem of plenty. Milk powder processors were stuck between excess supply and heavy inventories due to an earlier ban on exports.

Hatsun Agro with its earlier credentials was able to find a market though prices were not cost-effective. We lost some money on the transactions, but benefited from cost reduction on expenses per litre of milk due to the larger volumes. This effective cost helped other businesses, such as milk, ice-cream and curds.

What is driving milk sales?

In the sales of milk, unlike the competition, we do not use the existing distribution network, which is usually that of a local cooperative for the trade.

Hatsun Agro has its own centres for distributing milk and curd. They also sell ice-creams. The company has rented more than 1,500 places across south India and local agents deal with Hatsun products exclusively.

The agents are encouraged to buy vehicles for effective distribution of milk. Over 600 vehicles are now plying and there will be 1,000 before March 31.

Dairy ingredients, you said, will be a growth area. Do you see these inputs contributing more to the business?

As a dairy company, Hatsun will look primarily at milk, ice cream and curds. Curds will be a major focus in the coming year.

A Rs 33-crore curd plant with a capacity of 50,000 litres a day is coming up at Palacode. It is to start by February andwill add to the existing capacity of 70,000 litres.

Dairy ingredients constitute about 20 per cent of the business. This business will help handle surplus milk. As the main lines grow, there will be pressure on ingredients.

To meet that growth next year, we needed to accommodate the surplus milk. We have now set the foundation for next year.

From an export focus in dairy ingredients to the domestic market, how has the business changed?

Over the last three years the business has moved from commodity to branded products with the Hatsun range of dairy ingredients sold across the country.

After the ban on exports three years back the company focussed on the domestic market and continued to do so even after the ban was lifted. Two years back, 75 per cent of sales were branded; today, it is up to 92 per cent.

Now almost the entire milk fat is sold as Hatsun Ghee. Hatsun Milk Powder reaches domestic consumers in milk-deficit areas and Hatsun Dairy Whitener is sold in consumer packs in the North East. After two-and-a-half years, Hatsun Agro is close to breakeven in dairy ingredients and does not expect any setback irrespective of volume increases in this business.

Dairy ingredients will continue to have a decent growth and the focus is now on making it financially viable.

You have relaunched your ice-cream parlour chain under a new brand — Ibaco. What has this done for the ice cream business?

The Ibaco chain of parlours will back the growth in ice-creams. In the parlour segment, in the coming year we will be a market leader in the country.

We have over 80 Ibaco outlets and are opening 10 more every month in different parts of south India. By February we plan to have over 115 outlets. This is likely to give us substantial growth in ice-cream volumes. This is a non-competitive niche which Ibaco has occupied for itself.

Ibaco offers margins but calls for heavy investment per shop — Rs 25-30 lakh per outlet. This is possible through the economies of scale achieved by Hatsun Agro. The combined sales of Arun Ice Cream and Ibaco will give growth a big push compared with last year. As of now the two brands together have contributed to a 30 per cent increase. And we will grow twice as fast as the rest of the industry.

The Arun Ice Creams range is also being strengthened. The company has invested over Rs 6.5 crore in making cones, biscuits and chocolate paste as backward integration. This saves us cost on key inputs in this high-volume range. As a dairy company, the raw material cost — milk and fat — is lower.

How have you tackled the problem of power shortage?

The company needs over 5 crore units of electricity annually. It has entered into an alliance with PPS Enviro Power, a wind energy generator, for electricity supply this year. This will give us reliable power at a comparatively reasonable cost.

Early this year you told shareholders that the company would focus on bringing down overall costs, particularly in logistics. What is the situation now?

The logistics cost is a critical component in the dairy sector. As a percentage of distribution and procurement of milk, logistics was about 7.5 of our business two years back. It is now 6 per cent. We are targeting about 5.5 per cent. This compares well with industry standards of 7-9 per cent.

We managed this through the dispersed location of nine regional factories and economies of scale. . For milk distribution we use not less than 15,000-litre trucks and for procurement up to 23,000-litre tankers. We use the facilities to the maximum.

Over 80 chilling centres preserve farm freshness before the milk reaches the factories.

We are also introducing energy-efficient chillers, a product of research funded by us with work done by Promethean Power Systems, a US company.

For long-distance transport, we reduce one-way traffic. The company is working on sending dairy ingredients to North India and Western India and getting back packing material such as films on the return load.

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